EUR/USD has climbed to about 1.1625 in early European trading on Monday, ending a four-day slide. The US Dollar has weakened against the Euro due to President Trump’s announcement of a 10% tariff on goods from eight European nations, including the UK and Germany. These tariffs will take effect on February 1 and could increase to 25% in June if no agreement regarding Greenland is made.

European Response

In response, European leaders are planning to discuss possible retaliation. Concerns about a renewed trade conflict are weighing on the US Dollar, which helps boost the Euro. Meanwhile, US financial markets are closed for Martin Luther King Jr. Day. With a stable US labor market and ongoing inflation, traders expect no changes in the upcoming Federal Reserve meeting, with the CME FedWatch tool showing a 95% chance that rates will remain unchanged. The Euro is the currency of 20 Eurozone countries and made up 31% of global foreign exchange transactions in 2022. The European Central Bank (ECB) oversees monetary policy and interest rates in the Eurozone. Key economic data, like inflation and trade balance, heavily impact the Euro’s value and reflect the region’s economic health. As EUR/USD crosses above 1.1600, it’s clear that market reactions are more influenced by political risks than economic factors. The unexpected tariff threats against major European allies elevate political risk surrounding the US Dollar, leading to its decline. This trend hints that holding long euro positions may be advantageous as Europe prepares its reply. Support for the Euro’s rise comes from surprising data showing Germany’s ZEW Economic Sentiment for January has unexpectedly increased to 15.2, indicating some economic strength. The tariff threats are substantial; our analysis from 2025 trade data indicates that the US goods trade deficit with Germany and France alone exceeded $100 billion. The potential for strong retaliatory tariffs from a united Europe could further weaken the dollar.

Market Reaction

Due to the uncertainty about Europe’s response and the looming February 1 deadline for the tariffs, we anticipate a notable increase in implied volatility for the EUR/USD currency pair. Reviewing past market reactions to trade escalations in 2019 shows that headline risks often caused sharp and unpredictable price swings. Therefore, using options strategies like long straddles might be a smart way to trade the expected price movements without taking a specific directional bet. However, we must also consider the Federal Reserve meeting scheduled for January 27-28, which could limit any further decline of the dollar. The CME FedWatch tool indicates a 95% likelihood that the Fed will keep interest rates steady, reflecting a robust US labor market. A strong statement from the Fed emphasizing its data-driven approach could quickly attract buyers back to the dollar, capping the Euro’s gains at the current levels. Create your live VT Markets account and start trading now.

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